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Business Health: The basics of a profitability review

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THE BASICS OF A PROFITABILITY REVIEW

BUSINESS HEALTH

STRATEGIES TO HELP YOUR BUSINESS INCREASE PROFITS AND REDUCE LOSSES

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Profitability is a core concept that all successful businesses must understand. Without knowing how your company brings in money, it's much harder to invest in resources and projects that facilitate growth. Conducting a basic profitability review can help you identify opportunities for growth and where to cut spending.

The basics: Start with a profit and loss statement

Often referred to as “P&L,” the profit and loss statement is used by businesses of all sizes from sole proprietorships to large multinational organisations. This document has a clear purpose as it spells out income and expenses. Decision-makers utilise the P&L statement to easily classify where their business makes money and where its lost.

Your company may already have a P&L statement depending on how sophisticated your accounting department is regardless if finances are managed internally or externally. If you don't, you can get started by individually listing the ways in which your business generates income and spend money. Automated accounting software is available that can make this process more manageable. You can also use a spreadsheet to organise each amount and calculate your total revenue (the amount of money generated), expenses (the amount of money spent), and net profit (the remaining amount after expenses are subtracted from your revenue).

The revenue section of your P&L statement shows all activities that generate money for your business. This is where you can start reviewing the financial value of different ventures. You will likely have to look at the revenue generated by individual jobs and compare their differences and similarities if you already focus on one specific type of work. However, many business owners and decision-makers will be surprised to find

that some job types are generally more valuable while others aren't as financially beneficial to the company.

Putting your profitability information to work

1. Eliminate work that cost money or barely breaks even

A P&L statement can help your business determine where changes are needed. For example, a P&L statement can inform a residential construction company that regularly builds additions to existing properties provide meagre profits, that profit may not be worth the time and effort needed to execute these construction projects. Often, there are common threads tying together work that doesn't generate reliable income. Instead, look for opportunities to de-emphasise it and put additional time and resources into more lucrative ventures.

2. Focus on opportunities that generate dependable income

Your profitability review will also help you determine which business activities have the have the biggest positive impact on your company. As you shift your focus away from activities that don't provide a strong benefit, make sure to reallocate time and money into the work that does provide a great benefit to your business. These opportunities vary from business to business. Typically, identifying your best types of jobs can be done rather easily - whether it's your most stable crops or construction jobs that you can usually finish on time and under budget.

With this knowledge, you can target everything from hiring practices to major purchases of heavy equipment toward your most profitable ventures. The dual benefits of reduced spending on difficult work that provides few positive results and an increased emphasis on your most reliable money-makers can help every type of business.

Make sure you don't leave funds and opportunities on the table - conduct your profitability review today. Then, get in touch with Cat Financial for help acquiring the best tools for the job.

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